Best Buy gets the best of Microsoft in Windows Store deal

While Microsoft gained space in 600 Best Buy stores yesterday, the electronics retailer got the better end of the deal, an analyst said.

"This is a big win for Best Buy," said Stephen Baker, a retail analyst with the NPD Group, in a Thursday interview. "They get a free remodel of their PC department in 600 stores."

And if the Windows Store experiment flops, well, Best Buy still has the remodels in its pocket.

According to Baker and other analysts, Best Buy needs remodeling. The company's poor performance in the last year and its price-matching guarantee -- a move that tried to combat "showrooming," when consumers browse a brick-and-mortar store but purchase online -- had trimmed margins to the bone, leaving little for store refreshes or remodels.

For the quarter that ended May 4, Best Buy reported in-store sales were down 1% compared to the same period the year before.

Baker assumed that Microsoft was the one ponying up the money for the new Windows Stores, which will effectively replace the computer departments in the affected stores.

"That's the normal practice," Baker observed, talking about money changing hands whenever retailers dedicate space to a vendor. "This is really no different than advertising or an end-cap," he added, although the scale of this deal is obviously much larger.

Microsoft and Best Buy did not disclose the financial details of the deal, and Baker hesitated to take a guess.

Besides the partial remodels, Best Buy comes out smelling sweet for other reasons, Baker argued. "This forces Microsoft to acknowledge and allocate significant resources to Best Buy," he said. "It sets Best Buy apart from the other retailers. That's the most important part of this from Best Buy's perspective."

Best Buy didn't give up control over prices, the SKUs (stock-keeping units) to be displayed in the Windows, or the inventory purchased, Baker said, ceding only some say to Microsoft on special displays by other PC OEMs.

Nor does Best Buy become an arm of Microsoft's own retail chain, which numbers just over 60 outlets, since the 1,200 new employees who will staff the store-in-a-store concept will largely be the retailer's own. It's unknown whether Microsoft will subsidize those new workers.

While other experts, such as Forrester's J.P. Gownder, said the expansion into Best Buy was a long-overdue move by the Redmond, Wash. software giant, Baker disagreed. "I don't know if Best Buy would have been as receptive previously," he said. "Previously, sales were going okay, so something like this was not imperative."

But Best Buy realized, as did Microsoft, that selling Windows 8 and its offshoot Windows RT, and more importantly the explosion in form factors that touch-enabled operating systems prompted, wasn't working using traditional PC merchandising. Baker and others have criticized big-box retailers -- Best Buy is the U.S.'s biggest example -- for relying on old-fashioned sales techniques, but also laid some of the blame on Microsoft.

Best Buy and Microsoft need to change how Windows 8 and its hardware are sold, argued Patrick Moorhead, principal analyst at Moor Insights & Strategy, in a Thursday interview.

"Convertibles and detachables must be merchandised in a way that show how they really work, and their benefits," said Moorhead of the unusual devices that have popped up for Windows 8, like Lenovo's Yoga convertibles, which can be switched from tablet to notebook mode by folding back the display, and Microsoft's own Surface Pro. "There needs to be clear communication about what's a touch device and what's not," Moorhead continued, then cited other requirements, including making sure the devices were always turned on and always connected to the Internet.

He has also hammered Best Buy for its in-store security practices, which result in devices tied to shelving or on a too-short leash, making it difficult, even impossible, to pick up the hardware to feel its weight or to transform the device from tablet to notebook and back.

"I'm not certain exactly how they're going to do the security on the devices," Moorhead said. "I've been told they'll use the traditional Best Buy security, but if it's the standard half-inch cable [tying down the device], that's not going to fly with consumers."

Best Buy and Microsoft said that the new Windows Stores would begin opening later this month, with the transition wrapping up in September. Baker said the upcoming back-to-school sales season certainly contributed to the timing of the announcement.

"They'll want to get as much done by the middle of July as they can," Baker said, warning that the remodels will be significant -- likely including major shifting of shelving and some floor replacement -- and take one or two weeks during which the Best Buy store would be open, but hampered.

Microsoft and Best Buy have not released a list of those Best Buy locations that will get a Windows Store.

Copyright 2018 IDG Communications. ABN 14 001 592 650. All rights reserved. Reproduction in whole or in part in any form or medium without express written permission of IDG Communications is prohibited.